Buy the Dip, Sell the Rip

Macro Markets

Annual inflation moderated across US regions last month. The figures are similar to March 2022, when energy prices spiked immediately after Russia’s invasion of Ukraine. Consumer prices rose at the slowest pace in New England and the Midwest, with a 3.6% gain from the previous year. Mountain states in the West — an area that includes Arizona and Colorado — saw the highest inflation of all regions, at 6%. Headline inflation is showing signs of slowing down although core inflation is still sticky.

The Bank of America had their global fund manager survey, which showed a lot of great insight into what investors worldwide are thinking. The investors’ allocation to equities, relative to bonds has dropped to its lowest level since the global financial crisis as worries about a recession take hold.

The above chart could be seen as a contrarian indicator to risk assets as well. We could see a potential double-bottom scenario ahead due to fear. Investors indicated that fear of a credit crunch had driven up bond allocation to a net 10% overweight — the highest since March 2009. A net 63% of participants now expect a weaker economy, the most pessimistic reading since December 2022. The rally, however, has been moderated this month. Data show a softening in the labor market, raising worries that the economy could contract later this year.

In April, the “most crowded” trades deemed by global managers were long extensive tech stocks (30%), short US banks (18%), long China equities (13%), short REITs (12%), long European equities (11%) and long US dollar (5%), Hartnett wrote in the global fund manager survey Tuesday.

What’s more, managers are the most overweight defensive stocks versus cyclical since US equities bottomed in October. The tailwinds to the risk market are major credit events paired with a global recession and the Fed stays hawkish on the back of higher inflation prints. Geopolitical risk is also a concern at the moment. Overall the market and market participants have been sitting towards the one extreme of the market over the last two years. We would need inflation to keep pressing down and a dovish Fed to see the next big leg up. The bear market rally catalyst was the January payrolls number. Since then, inflation has reversed its trend slightly with core inflation edging higher. For any strong move up in macro and for inflation to move down, we would need to see unemployment move up significantly or inflation pressure down much more.

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